Bill Lerach is king of the “strike suits.” These are class-action lawsuits brought on your behalf (like it or not) against companies you may own shares in (which drives down the value of your shares if you still own them) but makes the lawyers a pile of money. Lerach’s San Diego firm takes in tens and tens of millions of dollars a year from these suits. He contributed almost $400,000 to the Democratic party last year, according to Common Cause, to gain a little White House “access.” His firm contributed $1.9 million to fight a California ballot initiative I was helping to push that would have curbed such suits at the local level.

Some of the suits are doubtless justified. Lord knows there’s a lot of foul play out there. And whether justified or not, the threat of lawsuits probably keeps some CEO’s a little more honest than they might otherwise be. So Lerach is right that the suits his firm and the handful of others around the country specializing in this field bring serve a valuable purpose.

But in a world of trade-offs, they also do a lot of harm, too — more harm than good. The game has gotten out of balance.

According to one study, all ten of the top ten public companies in Silicon Valley have been hit with one of these so-called “strike suits.” Is our whole high-tech industry run by crooks?

The way it works now, many of the suits are brought with little or no foundation. A stock drops on bad news; the word processors are fired up and a suit is filed alleging that the bad news should have been disclosed earlier or was purposely hidden from shareholders so insiders could sell their stock first. And sometimes that’s doubtless true. But often it’s not.

Yet the targets have to settle for a few million dollars anyway, because fighting the suits takes a tremendous amount of management time and effort, costs millions even if you win — and you can never know for sure what a jury will do. Even if you’re certain you’re innocent, is it really prudent to bet $100 million a jury will agree — or smarter to pay $10 million (some of which you would have had to pay in legal fees anyway, and some of which is covered by insurance) and just make it go away?

Most pay the toll, which results in $2 million or $3 million for Lerach’s firm or one of the others, and ridiculous little checks like $37.92 or $5.61 or $87.13 for the thousands of guys who own (or owned) 200 shares and went through the paperwork required to collect.

(I’ve done this myself once or twice. By the time you make sense of the legal papers and find and photocopy and mail in the brokerage statements from years ago proving you are a “member of the class,” and so forth, it can be easily an hour’s work. In my case, because I’m lucky enough to buy more than 100 or 200 shares at a time, the check I eventually got came to something like $335, if I remember right — not bad pay for an hour’s work, I guess, but really trivial in context of my overall investment.)

In most cases, T. Rowe Price vice president Liz Buyer told The San Jose Mercury News in the midst of our California ballot fight, suits of the type Lerach specializes in “not only aren’t helping the small investor, they’re causing significant harm. The one who gets hurt is the small shareholder. The one who gets helped is the lawyer.”

So Congress passed a bill to make these suits harder — but by no means impossible — to bring. The President came close to signing it, but on the advice of a couple of law professors, decided it tipped the balance just a little too far in the other direction. He vetoed it, but, one might say, half-heartedly. It was the only time in his presidency he’s been over-ridden. Joining in the override, lest you think this is all the evil Al D’Amato’s doing, or whatever, were Ted Kennedy, Barbara Mikulski and Dianne Feinstein. So it’s not just a Republican issue.

The President took a lot of heat for vetoing the bill. Many believe he did it as a favor to the trial lawyers and Lerach who’ve been such strong supporters of the Democratic Party. But you know what? Since it was pretty clear the veto wouldn’t stand — even Connecticut Senator Chris Dodd, chairman of the Democratic Party was working to override it, and the President made no real effort to avoid the override — why not?

I don’t mean to be cynical here, but if someone gave MY party millions of dollars and I could do something nice in return that wouldn’t hurt (i.e., be overridden), maybe in the real world that’s a good solution. Certainly better, in my view, than taking tobacco-industry money and doing REAL favors for the tobacco industry that are NOT overridden.

In any event, what’s put all this back in the news is Lerach’s latest move, putting his own initiative on the November ballot — Proposition 211 — that would essentially roll back the federal law for suits brought in California. Indeed, it would void the new law for the whole country, really, because it would allow suits to be brought if the public company in question had even just one California shareholder.

Last week, the President, to his credit, came out against Prop 211. It was clearly the right thing to do, because on balance Prop 211 would have been bad for both investors (who don’t want to see their companies mired in these suits) and bad for the economy (the way to compete with Toshiba and NEC and Sony is not by diverting management time from innovations to depositions).

Now the President is taking heat for having flip-flopped. But c’mon. In the first place, the main thing is he’s on the correct side of the issue, helping to defeat Prop 211. Flip-flopping should be encouraged when one is flopping in the right direction — or would we prefer a President who is steadfastly wrong?

In the second place, in vetoing the federal law, he never used his position to fight against the concept of the legislation — he acknowledged the reasons it was needed — he just said he thought it was flawed. If a politician sometimes does favors for his or her largest contributors, better that they be favors that, like the veto-he-knew-would-be-overridden, are of no practical consequence.

The bottom line, from my point of view: if you’re from California, vote NO on Proposition 211 in November.

We must always allow securities-fraud lawsuits — this is a balancing game, not a prohibition. But the way to police the securities markets isn’t to funnel hundreds of millions more into the pockets of Lerach and his small group of colleagues in this game. Better to appropriate one-tenth as much in additional funding for the S.E.C.

Dissenting views welcome.

Tomorrow: More on Ripley, Believe It or Not

 

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